Scotland’s income tax rises may have led to less money for public services than if tax policy had remained in keeping with the rest of the UK's, according to a leading think tank.

The Institute of Fiscal Studies has made the assessment which, it said came with a "high degree of uncertainty", in a briefing published today and as finance secretary Shona Robison weighs up her fiscal plans as she prepares for the Scottish Budget early next month.

Scottish income tax policy first diverged from the rest of UK income tax policy in 2017-18 when the higher rate of tax became payable in Scotland was frozen at £43,000 whereas it was increased to £45,000 elsewhere in the UK. 

Over subsequent years, further changes were made, including two new tax bands (a "starter" and "intermediate" tax band) and changes to the higher and top rates of tax. 

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In its most recent reform last year the Scottish Government introduced a new ‘advanced’ rate of 45% on incomes between £75,000 and £125,140, and increased the top tax rate (to 48%) in 2024–25.
Income tax policy in Scotland now significantly differs from that in place in rUK.

The changes were brought in with the aim of raising more revenue for public services. However, there has been much public debate about whether they have been successful or instead had a negative economic impact as tax payers seek to mitigate their tax liabilities and avoid the extra charges.

In a interview with The Herald earlier this year Deputy First Minister Kate Forbes said income tax policy would be "kept under review."

Finance minister Ivan McKee suggested earlier this month tax hikes are unlikely in next month’s budget when pressed in a BBC interview whether the current policy "had been counterproductive".

In its briefing today, the IFS states: "Available evidence from Scotland, the wider UK and other countries suggests that higher income tax rates affect behaviour – reducing work, increasing avoidance or evasion of tax, and impacting migration. 

"Estimates of the behavioural effects of the first stage of Scotland’s income tax reforms in 2018–19 are a little larger than assumed when the reforms were announced. Indeed, they imply that the increases in the top rate of tax may actually have reduced revenue – although this is subject to a high degree of uncertainty.

"Direct evidence on the impact of the bigger increases in income tax seen over the last two years is much more limited due to lags before tax records are submitted and processed.

"The think tank called for the Scottish Government and HMRC to update their analysis and to consider a broader tax strategy including to council tax which it said "is ripe for reform and less affected by behavioural responses".

David Phillips, an associate director at IFS and head of devolved and local government finance, said: "The scale of divergence in income tax bills between Scotland and the rest of the UK for high income earners has increased significantly over the last two years. 

"Someone on £125,000 a year, for example, would now pay around £5,200 more in income tax in Scotland than an otherwise-equivalent high earner living south of the border. That is up from £2,400 just two years ago.

"Research from Scotland, the wider UK and other countries points to such differences affecting taxpayers’ behaviour – how much they earn, migrate, and avoid or evade taxes.

"These responses are most significant for the highest-income individuals who, while few in number, contribute a large share of overall tax revenue. As a result, increases in the top rate of tax are unlikely to raise much – with evidence from the first of Scotland’s reforms in 2018–19 suggesting they may even reduce revenue.

‘There is still considerable uncertainty about this though. The bigger changes to income tax seen over the last two years – which have yet to be analysed – will provide a useful opportunity to learn more about taxpayers’ behaviour. In the meantime, the evidence currently available suggests that if the aim is to raise revenue, the Scottish Government should at least pause any plans for further increases in Scotland’s tax rates on higher incomes."

SNP ministers brought in new tax bands and rates in 2017–18 including increasing the higher-rate (40%) threshold by less than the UK government did between 2017–18 and 2021–2.

It split the basic-rate (20%) band into starter-rate (19%), basic-rate (20%) and intermediaterate (21%) bands, and increased the higher rate (from 40% to 41%) and top rate (from 45% to 
46%) in 2018–19. It further increased the higher rate (to 42%) and the top rate (to 47%) in 2023–24, while following a UK government decision to reduce the top tax threshold from £150,000 to 
£125,140.

The UK’s official spending watchdog the National Audit Office (NAO) in January this year warned that Scotland faces taking a financial hit because more people will avoid paying higher income tax north of the border.

It said that research last year by HMRC found that compliance was currently “consistent with the rest of the UK”. But it added: “There is a risk that this current position may not be sustainable in the longer term, particularly from 2023-24, when income tax rates in Scotland will diverge further from the rest of the UK.”